Homeowners are often surprised by what their insurance doesn't cover

SAN FRANCISCO (MarketWatch) -- After Hurricanes Katrina and Rita struck last year, homeowners in Louisiana and Mississippi learned what disaster victims elsewhere already know: Homeowners' insurance policies are not all-encompassing. But consumers all too often buy those policies without fully understanding the product.

"You get a homeowners' policy. You bought it from your brother-in-law. You think it covers everything. It's 26 pages of fine print. You put it in a drawer and forget about it until it's time to make a claim," says Robert Bland, chief executive of Insure.com, an online insurance broker and information Web site.

Only after disaster strikes do you become aware of the policy's exclusions. The most well-known of those is for flood -- homeowners must purchase this insurance separately -- but there are plenty of other limitations to consider.

Limitations

The best homeowners can do is know whether such clauses are in their policies and understand which types of events those exclusions apply to. In some cases, it may be possible to buy more-comprehensive coverage that will offset the limitations or exclusions.

For instance, the typical homeowners' policy has a $1,000 coverage limit for stolen jewelry, a $1,000 limit for damage to boats and a $200 limit for the loss of cash on hand. You can buy higher coverage or buy separate rider policies for high-value items.

Standard exclusions include earth movement, water damage, neglect, war and nuclear action, says Don Griffin, a vice president at Property Casualty Insurers Association of America, a trade group.

You can buy additional coverage for some of those exclusions. For instance, "earth movement" includes earthquakes and some areas offer this coverage, and "water damage" includes backed-up sewers, for which you can purchase coverage, Griffin says.

Faced with large claims for mold damage in Texas and elsewhere, some insurers have moved away from covering mold unless a peril that is covered, such as fire (and the resulting water to put the fire out) causes the mold.

Even if you've got mold coverage, there is usually a coverage limit, Griffin says. "It may be $5,000 or $10,000. You may be able to buy it up or down, but that depends on the state."

Homeowners should regularly check their house for mold, Bland says. "If you find mold, eradicate it on your own. Don't rely on your homeowners' insurance policy to cover mold."

Then there's flood. Homeowners must purchase a flood policy separately (the National Flood Insurance Program provides the coverage but you can often buy through your insurer). The federal coverage has a limit of $250,000 for property damage, but some insurers offer upgrades.

Other possible exclusions: wind and hail. After two years of major storms, insurers are re-evaluating their exposure to claims related to wind and hail, says Chad Brown, chief of staff at the Louisiana Department of Insurance.
 
That means homeowners seeking insurance in areas where severe storms have hit recently may have to buy wind and hail policies through state-run programs, "because the voluntary market is taking a cautionary approach," Mr. Brown says. States often create programs to provide supplemental coverage when insurance companies won't, similar to the federal flood insurance program and California's earthquake insurance program.

Insurers are saying "after the storms of the last two years, they have to look at their exposure. They're doing it countrywide," Brown said.

Another thing to check: Deductibles for different events. Often, policies charge a separate deductible for wind or hurricane damage, as much as 1% to 5% of the coverage limit (that's a $4,000 to $20,000 deductible if you've got $400,000 in coverage).

Consumers usually don't have many options out of these deductibles, but they should ask their insurer about discounts for safety features, such as hurricane shutters, or roofs that better withstand hail.

The cause clause

Meanwhile, some homeowners hit by hurricanes last year were surprised to find "anti-concurrent causation" clauses in their policies, aimed at limiting an insurer's payout when two events, such as wind and water, cause damage, says Rhonda Orin, a partner at Anderson Kill & Olick, a law firm representing homeowners in insurance cases.

While homeowners might say wind caused the damage first, insurers will often point to water as the culprit. Water damage is usually excluded from coverage.

"If 1% of the damage is caused by an excluded problem [insurers] can avoid coverage for the other 99% under their interpretation of this language," Orin says. "The anti-concurrent language kicks in as relevant because insurance companies say, even if it was something else first we don't care, because if it's water from flooding at all, it doesn't matter which came first."

For their part, insurers say those clauses are rare. Some states, including Washington and West Virginia, don't allow such provisions, though Utah does, Orin says.

What to do

For the major exclusions, homeowners often don't have much recourse, other than seeking coverage through another insurer or a state-run plan, if available.
But be sure to talk to your insurer about coverage. "When you get a credit card bill in at the end of the month, you look it over to make sure all the charges are yours," Griffin said.

"This is one of your most important assets. You might want to spend at least that long or perhaps a few hours once a year going over what you have and don't have and what you need and might need to purchase with your agent or your company to protect your home."

Also, visit your state insurance department's Web site to find out what's available. Some departments offer consumers toll-free numbers to call with questions. Some also offer online rate comparisons.

Find a good agent, says Bland. "A good agent is one that calls you once a year to review your coverage."

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By Andrea Coombes, MarketWatch

Andrea Coombes is a reporter for MarketWatch in San Francisco.

Copyright © 2006 MarketWatch, Inc. All rights reserved.